Saturday, October 26, 2013

Open Letter to the World Gold Council - Official Gold Statistics Are Misleading

by Eric Sprott, Markets at a Glance:

Dear World Gold Council Executives;

As you very well know, the business environment for gold producers has been extremely challenging over the past few years. While demand for physical gold remains extremely strong, prices on the COMEX have fallen precipitously. This contradictory situation is the single most important obstacle to a healthy gold mining industry.

In my opinion, the massive imbalance between supply and demand is not reflected in prices because available statistics are misleading. It is not the first time that GFMS (and World Gold Council) statistics have come under pressure from the investment community. In his now celebrated “The 1998 Gold Book Annual”, Frank Veneroso demonstrated the inconsistencies in GFMS gold demand data and proceeded to show how they grossly underestimated demand. The tremendous increase in the price of gold over the following years vindicated his conclusions.

For very different reasons, we are now at a similar pivotal point for gold. Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People’s Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers.1 In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions.2Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.

But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

To illustrate my point, Table 1 below contrasts mine production with demand from some of the world’s largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.

But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they “consume”, on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, “core” annualized demand is approximately 3,000 tonnes more than mine supply.


Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1 & Q2. Chinese mine supply comes from the China Gold Association and is up to August 2013, the annualized number is a Sprott estimate.5 Russian mine supply comes from the WBMS (Bloomberg ticker WBMGOPRU Index) and is for 2012, 2013 statistics are still unavailable. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Aug. 2013 and is annualized to account for the 4 missing months to the year. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1 & Q2 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1 & Q2. ETFs data comes from Bloomberg’s ETFGTOTL Index.

However, these figures also exclude what the GFMS dubs “OTC investment and stock flows”, which is a name for a simple plug because no one really knows what is traded in the OTC market. Also, to remain conservative and avoid possible double counting, I exclude the category “technology” from my demand estimate, which the WGC/GFMS estimates to be about 400 tonnes a year.6 Certainly, some of this demand is captured by the demand numbers for China, Turkey, India or Thailand, but it is near impossible to disentangle them. Nonetheless, it should be kept in mind that my demand estimate is conservative and probably understated by a few hundred tonnes.

Of course, another important source of supply is gold recycling, which the GFMS estimates at about 1,300 tonnes for the year. However, this number is questionable at best as gold recycling is hard to estimate. But, most importantly, a large share of it is probably done in India and China, which as mentioned before do not re-export their gold. In the context of my analysis, recycling from those countries should therefore be excluded from the total supply number.

The real incremental source of supply this year has been the flows out of ETFs. According to data compiled by Bloomberg, and as shown at the bottom of Table 1, ETFs have seen outflows of approximately 724 tonnes year-to-date. On an annualized basis, this represents an additional supply of 917 tonnes. But, this incremental supply is only temporary. As shown in Figure 1 below, ETF holdings of gold seem to have stabilized at around 1,900 tonnes after a rapid decline in the first few months of 2013.

The evidence presented here is clear, demand for physical gold is extremely strong and, in reality, without the massive outflows from ETFs (half of world mine supply), it is hard to imagine how this demand would have been met. Since ETFs have a finite size (about 1,900 tonnes left), these outflows cannot continue for much longer (see our article on the topic).7 All these observations point to a considerable imbalance between supply and demand (unless Western Central Banks decide to fill this void with what is left of their reserves). If recycling was reduced by one half (China, India and Russia) and the temporary sales from ETFs were excluded, demand could be as high as 5,185 tonnes versus supply of 2,140 tonnes. The supply-demand imbalance is obvious to all.



Source: Bloomberg

As was the case when Frank Veneroso first published his book in 1998, the GFMS methodology understates demand and the World Gold Council, by using data from the GFMS, misleads the market place.

To conclude, I urge the leaders of the World Gold Council, for the benefit of their own members, to improve the quality of their data and find alternative sources than the GFMS, which paints a misleading picture of the real demand for gold. This lack of quality information has certainly been one of the driving factors behind the lack of investors’ confidence towards gold as an investment. Gold has been one of the best performing asset classes since 2000, and the World Gold Council should be promoting it accordingly.


Eric Sprott

- Source, Markets at a Glance:

Thursday, October 24, 2013

Eric Sprott's Take on the Government Shutdown

Listen to Eric Sprott's views on how the US government shutdown affect the precious metals markets, and more importantly, your investment in pensions and retirement savings.

- Source, Sprott Money:

Tuesday, October 22, 2013

Don't Expect the Money Printing to End

Money manager Eric Sprott was not surprised by the Fed announcement to keep printing $85 billion a month. Don’t expect the money printing to end any-time soon because Sprott predicts,“If my forecast for the U.S. economy is true, they will be doing it forever.” 

When the Fed first started taking about cutting the money printing, Sprott points out, “It was a great excuse to bomb gold, and now that’s off the table. I think we will see people moving into gold (and silver) . . . The U.S. dollar is under incredible pressure here.” 

Sprott, who manages $8 billion in precious metal investments, goes on to say, “I can guarantee you the U.S. government is insolvent today, but they’re just not doing anything about it. So, when they finally do something about it, instead of cutting entitlements 25% or 40%, just like Detroit, it will be 75%.” Sprott goes on to say, “ We’re buying more bonds on a daily basis, and rates still went higher, which is why I can definitively say the Fed lost control of the bond market. That is why they could not ‘taper’ because who’s going to buy all the bonds? Bonds are for losers.”

- Source, USA Watchdog:

Sunday, October 20, 2013

Sprott Launches New Offshore Fund with Zijin Mining Group

TORONTO, Sept. 27, 2013 /CNW/ - Sprott Inc. (TSX: SII) ("Sprott" or the "Company") today announced that it has launched a new offshore global mining fund (the "Fund") with Zijin Mining Group Company Limited ("Zijin"). All relevant regulatory approvals have been received in Canada and the People's Republic of China and the Fund has been initially seeded withUS$100 million from Zijin and US$10 million from Sprott.

"We are very pleased to launch this new fund which will allow us to open a new market for our investment products," said Peter Grosskopf, CEO of Sprott. "Zijin is the largest gold producer and the second largest mined copper producer in China and is listed on both the Hong Kongand Shanghai stock exchanges. We believe the combination of Zijin's technical strengths and Sprott's resource investment expertise will prove to be an attractive option for investors looking to invest in the mining sector with a focus on gold."

The Fund management company is a joint venture between Sprott and Zijin and will invest primarily in the publically-listed equity and debt instruments of gold, other precious metals and copper mining companies. The Fund will be co-managed by affiliates of Sprott and Zijin. Under the joint venture agreement, Americas Now Resources Investment Management Corp. has agreed to provide technical and marketing services to the Fund.

The target size of the Fund is US$500 million and the Company anticipates receiving additional commitments from onshore Chinese investors beginning in the fourth quarter of 2013.

- Source, Sprott Inc:

Friday, October 18, 2013

New Chairman of the Federal Reserve Janet Yellen

This week, Janet Yellen was elected as the new Chairman of the Federal Reserve. What does this mean for the gold and silver markets? Join us and listen to Eric Sprott's views on this now!

- Source, Sprott Money:

Wednesday, October 16, 2013

This Housing Market Has Got to Fail

"We've seen redemptions of bond funds. I, for my life, can’t see how at this point in time the Fed pulls back on their bond buying because rates would just go crazy (to the upside).

The jobs numbers that came out in the last two months, you know we averaged about 130,000 (jobs) when they adjusted July down, and August was kind of so-so -- and you can drive a truck through the numbers anyway. It’s my suspicion that there are a lot of the jobs are part-time jobs, and so I think we have a really weak economy here.

And if they do taper, and rates go higher, we already have a crushing situation in housing, where literally the cost of buying a house on a monthly basis, i.e. the interest rate cost, the principal cost, and the cost of the house has gone up 10% or 15%, is up (in total) 50% year-over-year. And nobody’s income is up 50%. I would be surprised if it’s up 2%. In fact, it’s probably down with the increase in social security taxes.

So this housing market has got to fail. The Fed knows this. The charges against the US Treasury are rising as rates are rising, which means the deficit is going to go back up. I wrote a paper, I guess it was about three or four months ago, asking, has the Fed lost control of the interest rate markets? And I suspect they have."

- Eric Sprott via King World News:

Monday, October 14, 2013

There is a Shortfall of Gold

I think there is a continued suppression going on -- the numbers (definitely) argue for that. There aren't a lot of numbers available, but even the few we have, like the six or seven sources, I calculated a year ago that there is a shortfall of something like 2,200 tons (of gold) each year in a 4,000 ton market.

- Eric Sprott via King World News:

Thursday, October 10, 2013

The Fed Has Lost Control of the Bond Market

In his most explosive interview with SD ever, CEO of Sprott Asset Management Eric Sprott discussed his thoughts on the Fed's no-taper, why he believes the cartel took down gold this spring, the evidence that a bail-in is coming to the US and Canada, and the US fiscal debt crisis.

- Source, Silver Doctors:

Tuesday, October 8, 2013

Gold is Going to $2400 by Next Summer

Billionaire Eric Sprott backs up his prediction that gold will hit $2400 by next summer. Taped at Cambridge House's Toronto Resource Investment Conference 2013.

- Source, Cambridge House:

Sunday, October 6, 2013

Bonds Are for Losers

The CEO of Sprott Asset Management, Eric Sprott, says, "We're buying more bonds on a daily basis, and rates still went higher, which is why I can definitively say the Fed lost control of the bond market. That is why they could not 'taper' because who's going to buy all the bonds? Bonds are for losers." Join Greg Hunter as he goes One-on One with gold and silver expert Eric Sprott who manages $8 billion.

- Source, USA Watchdog:

Friday, October 4, 2013

Is Billionaire Eric Sprott Selling Silver?

Marin Katusa, the Chief Energy Investment Strategist from Casey Research asks Eric Sprott a number of questions about gold, silver and his plans for Sprott going forward.

- Source, Casey Research:

Wednesday, October 2, 2013

The Bull Market Has Started Again

“Well, as I sit back and look at it, Eric, I think it is the greatest. To imagine you could make that much money (3,000%) in one year, as other financial markets are not performing well. And here we have this huge opportunity to own the metals, and/or the shares, and make this out-sized return, which is exactly what happened in that last decade when the gold stocks rallied by 1,800% off the low.
So that’s the type of thing that we’re looking at here -- a re-continuation of that phase. We took a 2-year pause, but it certainly looks like it has restarted again.”

- Eric Sprott via King World News: